Avoid the 2 Big Mistakes Small-Cap Investors Make
Investors in small-cap stocks often make two expensive mistakes. And now is the time to make sure you’re not committing these investing sins, because small stocks look as if they are beginning to rally after years of underperformance.
Small-cap stocks are issued by companies with a market capitalization that typically ranges between $300 million and $2 billion. These stocks are generally more volatile than larger-cap stocks, which makes them react more wildly to investor sentiment. The ability of these stocks to make quick gains and losses makes them risky and leads to high-pressure transactions for investors hoping to buy or sell.
Market capitalization and stock price
Whether a stock is classified as a microcap or not has nothing to do with its share price. It’s completely possible for a large-cap stock to trade for under $10 per share, just as it’s possible for a microcap stock to trade for several hundred dollars per share.
Instead, the classification is based on market capitalization, which is the entire market value of a company’s outstanding shares. The market capitalization, or market cap, is typically included in most stock quotes, but it can be calculated by multiplying a company’s number of outstanding shares by its current share price.
Because it’s based on the current share price, a company’s market capitalization fluctuates constantly. A stock is generally classified into one of the categories based on its market cap as of a certain date.
Investing in microcaps
Generally speaking, microcap stocks are riskier and less stable than stocks of larger companies. Many microcaps trade on the pink sheets or OTCBB, which have lower listing standards than the NASDAQ and NYSE. Because of this, there is generally less information and analysis available to investors about microcaps, and therefore it can be tougher to properly evaluate their investment merit.